Economists are forecasting that heated housing market will continue for much of 2021, fuelled by low interest rates that are tipped to stay low over the next few years.
Nick Tuffley, chief economist for the ASB, told OneRoof that Auckland’s housing shortage had seen chronic underbuilding for some time and it would take time to build enough houses to make up for the shortfall.
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“Demand is still strong. Owner-occupiers, investors and first home buyers are responding strongly to the very low interest rates, which we expect to be one of the dominant factors driving the market this year,” he said.
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“We see the potential for interest rates to creep down further but their influence [on the market] will start to wane as building activity picks up,” he said.
Tuffley said the lack of listings was helping drive prices momentum but supply would slowly catch up.
“We see the year starting pretty hot but as we get into the second half of the year we’re likely to see some of the momentum moderate,” he said.
Risk of panic-buying
The low interest rates had also boosted other areas of the economy, such as agriculture and horticulture. “From a New Zealand point of view we are still in our own bubble/gilded cage. We’ve got a large part of the country which is swimming along really nicely. Retail spending as well has been quite strong,” he said.
“The pretty unbelievable thing is that when you look purely at GDP, the economy is already bigger than it was prior to the pandemic so that’s a testament to how resilient we have been.”
Even though prices were rising, Tuffley warned Kiwis against panic-buying. “My thoughts are people need to focus on what their goals through home ownership are and how they can achieve those,” he said.
He predicted the pendulum would swing slightly away from sellers, as more stock appeared, and that the heat in the market would not be as strong as it had been in the last months of last year.
“I think there’s a thing about being patient. The market at the moment doesn’t have a lot of stock so there are some fairly thin pickings and there’s always that risk of paying over the odds for something which isn’t quite suitable if you haven’t had much choice,” he said.
Potential outbreak
BNZ’s chief economist, Craig Ebert, said it would be pushing it to think interest rates could keep lowering at the rate of knots they have been but points out there have been a lot of big forces in the market. “It’s still an open question how they’ll all play out over the coming years and including this one,” he said.
At some point down the track a lift in interest rates might need to be factored into the market, but not immediately, he said.
Net migration and a shortage of listings were also having a big impact, Ebert said. “I think for the moment you’ve got this big backlog of people that are contributing to a lot of demand/pressure in the housing market.”
KiwiBank senior economist Jeremy Couchman said the fundamentals of low interest rates and housing supply issues hadn’t changed, which could add further momentum to the already stretched market.
Testing for Covid-19. Another outbreak in NZ could put the economy at risk. Photo / Getty Images
However, the economy was still at risk from Covid-19. “The global situation is worse probably than it was prior to Christmas. The New Zealand economy is still at risk from another potential outbreak here so that would, depending on what the Government does, certainly have some impact.”
Couchman warned the strong house price growth could fuel inequality, with the potential for some groups, such as first home buyers, to step out of the market.
“That has been a concern. In 2016 when Auckland had a stellar run then there was certainly a lot of people stretched and pushed out of the market.”
US wobble
Sharon Zollner, chief economist for the ANZ, agreed there was still upward pressure on prices but said the slight wobble experienced in the United States could impact interest rates in New Zealand.
“Generally, what kills off housing booms are either contractions in credit availability or lifts in interest rates, and it’s difficult to see either of those things happening rapidly but we are expecting some moderation in credit availability in terms of the LVR {loan to value ratio] restrictions being put back on and some banks, including my own, have moved proactively to put those restrictions on already,” she said.
She said yield curves in America were steepening quite aggressively, which meant people were starting to look past Covid.
“Obviously, Covid’s terrible at the moment but people are looking to the other side of it and thinking maybe there will be a bit of inflation. If that persists, then that could put some upward pressure on the longer mortgage rate and that is transferring a little bit into our market.
“That’s just a few wobbles at the moment but it’s something to watch. Already the US 10-year yield has lifted quite a lot but then it gradually percolates globally and people kind of make up their mind about whether it’s going to be sustained or not.
“Eventually, if it’s sustained you might see those longer rates creep up. Wherever we are in the business cycle, wherever we are with interest rates, it’s always a good idea to hedge your bets and split your mortgage and divide it up over different terms. You rule out the best case scenario but you also rule out the worst one.
“Just to be clear, I don’t expect long rates to start rising any time soon but it’s just sitting out there as something that probably hasn’t reached the mainstream yet because it’s mainly a US story.”
